Financial planning after redundancy – funding your start-up

Being made redundant from your job can be a stressful and traumatic experience.

However, redundancy can sometimes be a blessing in disguise, with many people using the opportunity to launch their own business.

Redundant employees often possess an advantage over other founders because they have a redundancy pay out, which can be used to fund their new venture.

Many laid-off staff, particularly older workers, may also benefit from experience and valuable contacts.

Although you may have some initial funding, financial planning is crucial to making a success of entrepreneurship after redundancy.

This guide outlines steps for how to do it.

Budgeting the initial phase

Redundancy typically involves a notice period, which is a good time to create a business plan that outlines your objectives.

Part of this planning could be used to create a realistic budget.

To do this, you need to work out your start-up costs, which typically include:

• start-up assets – equipment you need to operate your business, such as machinery, computers, and vehicles
• start-up costs – initial expenses such as company registration fees and web hosting
• fixed costs – expenses you have no matter how many sales or customers your business generates, such as broadband, electricity, rent, mortgages, insurance, and phone services
• variable costs – expenses that vary depending on the output or sales revenue of your business such as costs for materials, production, marketing, income taxes, travel, events, freelance services, and shipping of products.

Using these costs, you can calculate how much money you’ll need to get your business off the ground, start trading, and break even.

Find more details with our guide to calculating start-up costs.

As you are just starting a new business and won’t have sales data to base your budget on fully, you have to make predictions, particularly for variable costs.

It’s wise to overestimate these expenses to ensure you’ll have enough money to keep going.

Make these predictions for at least 12 months ahead in a cash flow forecast.

Download our free cash flow forecast template to help you get started.

Your budgeting may highlight a need for external funding, and you’ll need a cash flow forecast alongside your business plan and other documents when applying for most funding.

Maximising a redundancy payment

Once you’ve worked out your cash flow forecast and budget, you’ll know how much money you need to launch your business and the funding you require to keep going.

If you’ve received a redundancy payment, you can use this to fund your start-up’s launch and other expenses.

Depending on the amount, this might fully cover what you need, or you might need funding from elsewhere.

Another factor you need to consider is your personal financial security.

Going from a full-time wage to starting a business means you may not initially have the regular income you are used to, so think about what you need to live on versus how much you want to invest in your business.

You may need to take steps to reduce your planned expenses, such as purchasing second-hand rather than new equipment, to cover your living costs.

Start-up life can be unpredictable, so having an emergency fund to cover unforeseen costs may be wise.

Part of your redundancy payment could be used to initially cover this fund until you start trading and can allocate some of your sales revenue towards it.

Additional funding options and financial planning

If you don’t have sufficient cash for your start-up, you have plenty of funding options, such as:

Start Up Loan

A Start Up Loan is a government-backed personal loan for individuals starting a new business or trading for up to 36 months.

You can borrow between £500 and £25,000, with a fixed interest rate of 6% per year and a loan repayment term of one to five years.

Successful applicants also receive 12 months of free business mentoring.

Angel investors

An angel investor is a wealthy individual who uses their own money to invest in small businesses.

They usually bring business experience and advice as well as funding.

Angels backs start-ups with a strong potential for growth and high returns on investment.

They also look for knowledgeable founders, which can be an advantage for those made redundant who have experience in the industry their new business is operating in.

Read our guide to angel investment.

Crowdfunding

Crowdfunding involves using an online platform to pitch your business in return for funding from members of the public or investors.

With equity crowdfunding, you give away shares in your business in return for the money, while with reward crowdfunding you provide a reward, such as early access to your new product, in exchange for investment.

When seeking funding, you should focus on sustainable business growth and only take on debt if you can afford it.

You should ensure you meet your personal income requirements and don’t build up unsustainable debt or take inappropriate investors on board.

In all cases, seeking professional financial advice before taking on debt can be a good idea.

Read our guide to crowdfunding.

Experience and networks

Many redundant employees go on to operate a business in the same industry in which they originally worked.

This is often a good idea because you’ll likely have experience and contacts which will be useful to your new company.

Even if you aren’t staying in the same sector, the people you know could be beneficial.

They might be able to offer advice, become a customer, provide angel investment, or make introductions to useful people.

Once you’re ready to go public with your new situation, tell appropriate individuals to see if they can help.

Ways to do this include making an announcement on professional networks such as LinkedIn, and emailing contacts.

If you have specific requirements, make it clear in your messages.

You can build new contacts by attending networking events.

Find relevant conferences, exhibitions, workshops, and meetings by searching websites such as Eventbrite and Meetup, joining business membership groups and asking contacts on social media.

Before attending events, practise your introduction so you can succinctly describe your start-up in a few sentences.

Business cards can be helpful or add new connections on LinkedIn.

Think about why you’re attending an event and the ideal person you’d like to meet.

When speaking to people, it can be a good idea not to oversell your own business.

Show interest in them by asking questions about what they do and being attentive to their answers.

After an event, follow up promptly by email or social media and set up meetings where appropriate.